Inventory management

The two failures inventory management prevents

Stockouts are the visible one. A customer asks, you cannot supply, and they buy elsewhere — often permanently, because you have just demonstrated that a competitor is more reliable.

Overstock is the expensive one, and it is invisible. Cash converted into goods that sit for months is cash unavailable for anything else. In businesses with thin margins, overstock is the more common cause of cash-flow trouble, and it rarely gets diagnosed because nothing appears to be going wrong.

Both come from the same root: buying decisions made without knowing what is already held and how fast it moves.

Reorder points, and how to set one

A reorder point is the quantity at which you should buy more. The usable version for a small business:

Reorder point = (average units sold per week × supplier lead time in weeks) + buffer

If you sell roughly 20 units a week, your supplier takes two weeks, and you want a week of cover for delays, that is (20 × 2) + 20 = 60 units. When stock hits 60, order.

Two practical adjustments. Increase the buffer for anything with an unreliable supplier or a long import lead time. Decrease it for perishable or fast-obsoleting goods, where the cost of holding exceeds the cost of an occasional stockout.

Recording movement so the number stays true

Stock changes for more reasons than sales. All of these need recording or the figure drifts:

• Goods received — with quantity and cost, against the supplier.
• Sales — handled automatically when you invoice from the catalogue.
• Dispatches — with a waybill, where goods move separately from the invoice.
• Returns — back into stock, or written off if unsellable.
• Damage and loss — the entry most often skipped, and the largest single source of drift.
• Internal use and samples — goods that leave without a sale still leave.

Finding the stock that is costing you money

Once movement is recorded for a few months, one question becomes answerable: what has not moved? Slow stock is worth reviewing quarterly, because the options narrow the longer you wait:

• Discount to clear — recovers cash, even at reduced margin.
• Bundle it with something that does sell.
• Return to supplier if terms allow — worth asking even when they do not.
• Write it off and stop counting it as an asset.

The instinct is to hold on because it cost real money. That money is already spent; the only live question is how much of it you can recover.

Counting stock without shutting down

Annual full counts are disruptive and, by the time they happen, tell you about errors that occurred months ago. Cycle counting works better for small businesses: check a small sample regularly instead of everything rarely.

A workable rhythm is twenty items a month, weighted toward your fastest movers and highest-value stock. Discrepancies are found while the cause is still traceable, and the business never stops trading to do it.